Team Name: The conquerors
Institute Name: NMIMS
Team Members:
Name: Jigar Shah Kavitha Rajan
Email: jigar.shahft09@nmims.org kavitha.rajanft09@nmims.org
Phone: 9819952441 99672457453
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The Debate on Capital Account Convertibility in India
Executive SummaryCapital Account Convertibility is considered the hallmark of a developed economy. CAC, as defined by Tarapore committee is the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange.

CAC is in line with the classical theory of economics where markets clear itself and attain equilibrium prices by creating demand for the given supply levels. This assumes the presence of an invisible hand enabling the market clearance. But patrons of the Keynesian economics believe that the markets are governed more by market sentiments than fundamentals in the short term. This short term perspective of the investors can destabilize the economy and create volatility in the market. Hence it is important that the country has strong macroeconomic factors to support the volatility.

In late 1980’s India faced a balance of payment crisis due to fiscal imbalances. India’s credit rating was downgraded and access to external funds became bleak. By early 1991, foreign exchange reserves were almost depleted, and India was on the verge of default. IMF came to the rescue and provided the necessary funds to pull India out of the crisis. In 1994, as a part of Article VIII of IMF, India implemented Current Account Convertibility and accepted to implement Capital Account Convertibility.

Under the supervision of IMF other developing economies had implemented CAC. They had fixed exchange rate system pegged to the USD. When the Dollar rose, consequently the ASEAN currencies grew too, resulting in lower exports. This resulted in a decline in export earnings of these countries and thus increasing their trade and current account deficit. The crisis first emerged in Thailand in 1997 when a loan repayment crisis led to fears of loan defaults and foreign short-term creditors withdrew funds from Thai financial institutions. This withdrawal of led to pressure on forex reserves and the value of Baht. The Bank of Thailand in its attempt to save the Baht lost all its Reserves and had to request assistance from the IMF. This eventually spread to Philippines, Malaysia and Indonesia and thus led to the outbreak of the South East Asian crisis. After taking important learning from the CAC crisis in South East Asian countries, India has adopted a gradual phased approach towards the implementation of CAC. Tarapore committee which was set up for this purpose had suggested certain pre-conditions for the implementation of CAC. India has been consistent in its commitment towards CAC and has shown marked improvements in some of the factors mentioned in the Tarapore committee. But India’s march towards CAC needs to be dealt with caution as the risks involved in capital inflows into the country are huge.

IMF has predicted the Indian economy to grow at a rate of 8.9% which puts India on the path of growth along with other emerging economies. India stands to gain by implementing CAC provided all the measures are in place to effect a successful implementation and the macroeconomic factors of the country are strong enough to support the surge in capital inflows. To start with the interest rates in India are higher compared to US and other developed economies. This results in inflow of foreign currency into India to artibitrage the differential interest rates. This inflow of money will reduce the cost of capital for the Indian companies and this in turn could be utilized for growing the economy further. It would also enable Indian investors to diversify their portfolios and reduce their risk.

It should be noted that the capital inflows will put immense pressure on the foreign exchange market and the volatility of the dollar and rupee is bound to increase....

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...intensified debate on the issue of CapitalAccountConvertibility (CAC) in India. There is no formal definition of CapitalAccountconvertibility but the Tarapore committee set up in February 1997 gave a pragmatic working definition of CAC as “CAC refers to the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. It is associated with changes of ownership in foreign/domestic financial assets and liabilities and embodies the creation and liquidation of claims on, or by, the rest of the world. CAC can be, and is, coexistent with restrictions other than on external payments. It also does not preclude the imposition of monetary/fiscal measures relating to foreign exchange transactions which are of a prudential nature”. So this means that CAC will result in free and unregulated inflow and outflow of Capital funds. India has since long adopted the Current AccountConvertibility wherein the exporters and importers can have easy conversion to and forth in foreign currency where they trade.
Benefits of CapitalConvertibility
The implementation of CAC opens up the economy in terms of capital inflows and outflows:
1. Greater Capital Mobility: If CAC is allowed, it is argued that...

...“FULLER” CAPITALACCOUNTCONVERTIBILITY
A boon or a bane!
Abstract
This is the era of competitive economies and India is one of the pioneers. In the recent years, India has been consistently moving towards becoming a developed nation with its IT and technical advancement, intellectual capital, off shoring and outsourcing to boast of. Capitalaccountconvertibility is one of the main features of developed economy. India’s inclination towards CAC, when the Tarapore committee first suggested it in 1997 and after their latest report in 2006, indicates that it is aiming to cash on this opportunity to realize the potential of the economy to the maximum possible extent. Fuller CapitalAccountConvertibility implies the freedom to convert domestic financial assets into overseas financial assets and vice-versa co-exists with reforms, restrictions and regulatory measures. Thus FCAC brings what is most required today in India-cheaper capital to accelerate the pace of investment, diversification of investment to reduce risk and integration with the global markets alongwith the urgency for strengthening the macroeconomic framework. In this paper, we have studied the prerequisites for implementing FCAC, India’s position and efforts so far, the Asian crisis and lessons learnt from it,...

...almost half of total capital inflow to developing countries. The economies of Southeast Asia in particular maintained high interest rates attractive to foreign investors looking for a high rate of return. As a result the region's economies received a large inflow of hot money and experienced a dramatic run-up in asset prices. At the same time, the regional economies of Thailand, Malaysia, Indonesia, the Philippines, Singapore, and South Korea experienced high growth rates, 8-12% GDP, in the late 1980s and early 1990s.
At the time Thailand, Indonesia and South Korea had large private current account deficits and the maintenance of pegged exchange rates encouraged external borrowing and led to excessive exposure to foreign exchange risk in both the financial and corporate sectors. In the mid-1990s, two factors began to change their economic environment. As the U.S. economy recovered from a recession in the early 1990s, the U.S. Federal Reserve Bank under Alan Greenspan began to raise U.S. interest rates to head off inflation. This made the U.S. a more attractive investment destination relative to Southeast Asia, which had attracted hot money flows through high short-term interest rates, and raised the value of the U.S. dollar, to which many Southeast Asian nations' currencies were pegged, thus making their exports less competitive. At the same time, Southeast Asia's export growth slowed dramatically in the spring of 1996, deteriorating their...

...CapitalAccountConvertibility. Should India adopt full convertibility?
CapitalAccountConvertibility-or a floating exchange rate-is a feature of a nation's financial regime that centers around the ability to conduct transactions of local financial assets into foreign financial assets freely and at market determined exchange rates. It is sometimes referred to asCapital Asset Liberation or CAC.
CAC is mostly a guideline to changes of ownership in foreign or domestic financial assets and liabilities. Tangentially, it covers and extends the framework of the creation and liquidation of claims on, or by the rest of the world, on local asset and currency markets.
Current accountconvertibility allows free inflows and outflows for all purposes other than for capital purposes such as investments and loans. In other words, it allows residents to make and receive trade-related payments -- receive dollars (or any other foreign currency) for export of goods and services and pay dollars for import of goods and services, make sundry remittances, access foreign currency for travel, studies abroad, medical treatment and gifts, etc.
Capitalaccountconvertibility is considered to be one of the major features of a developed economy. It helps attract foreign investment. It offers...

...Rupee Convertability on CapitalAccount
The capitalaccount, takes into account cross-border flow of funds that are associated with financial or other assets in the trading countries. For example, the direct and portfolio investments made by foreign investors, in India, are captured by the capitalaccount balance of the BOP. The capitalaccount also encompasses foreign investments of Indian companies, foreign aid and bank deposits of Non-resident Indians (NRI).
Capitalaccountconvertibility implies the right to transact in financial and other assets with foreign countries without restriction. For example, if a currency is convertible on the capitalaccount, the residents of the domestic currency may freely convert it into other (convertible) currencies to purchase and maintain bank accounts abroad. Similarly, residents of other countries should also be able to freely convert their currencies into the domestic currency to purchase domestic capital and money market instruments. In other words, capitalaccountconvertibility is associated with the vision of free capital mobility.
Convertibility as an issue, and subsequently as a goal, was a priority in the agenda...

...ASSIGNMENT
FINAL REPORT
TOPIC: CAPITALACCOUNTCONVERTIBILITY
ABSTRACT
This report has been prepared to discuss the issue of CapitalAccountConvertibility (CAC) and India’s experience with it. The concept of CAC and its history and its implications has been discussed. The recommendations of the Tarapore Committee (the committee set up for looking into the issue of CAC) have been presented. Lastly, the progress made towards CAC in India and its implications have been discussed.
SUMMARY
Continuing on the way of economic liberalization and economic reforms and against the pressure by left and democratic parties, the prime minister announced on March 18, 2006 his government’s resolve to move towards full capitalaccountconvertibility of Indian rupee ignoring even the advice of his pro-liberal friends. In order to operationalise this, a committee named as Tarapore II under the leadership of S.S.Tarapore, ex-deputy governor, RBI was constituted by the RBI which commenced its work from May 1, 2006 and has since submitted its report on August 31, 2006 to RBI.
This new report has generated a fresh debate on the fuller capitalaccount...

...7/30/2015
CapitalAccountConvertibility A Boon Or A Bane Economics Essay
CapitalAccountConvertibility A Boon
Or A Bane Economics Essay
Currency Convertibility means ease with which a particular currency or domestic currency can be
converted into any other international currency and vice versa. Based on their convertibility
currencies can be categorized into three groups namely:
Non Convertible currencies are those which cannot be converted into other internationally
accepted currencies and vice versa i.e. countries of such currencies do not participate in FOREX
Markets.
Partially Convertible currencies are those which can be traded in the market with some
restrictions from central bank of the country i.e. they can't be freely traded.
Fully Convertible currencies are those which can be freely traded without any restrictions from the
central bank of the country.
Currency convertibility can be talked about in terms of two specific things which are Current
AccountConvertibility which refers to freedom in conversion in respect of payments and transfers
of current international transactions and CapitalAccountConvertibility which refers to
convertibility in respect of capital transactions in terms of inflows and outflows. In India Full...